Whatever you invest in, you should be clear about what you are doing. When it comes to investing, you do not have the option of seeing where something goes. The best way to invest is to take certain decisions based on a specific goal that you want to achieve in a given time period. For instance, you can decide to invest about Rs.2 lakh in a fixed deposit for a period of five years at about 7% interest. In such a situation, you know how much you are investing and for how long and what your reasonable return will be at the close of the investment period. But this pertains to an investment like a fixed deposit which is reasonably secure.
What about investing in stocks?
When it comes to investing in stocks, while you cannot be absolutely sure of what your returns will be in a given time period, you can make an educated guess regarding the same. It would help if you have a reasonable expectation of what you can make within the time period you have specified. For instance, expecting the share price of a company you have invested in to double in six months is not reasonable. However, if you are investing in the company for the longer term, say five to ten years, expecting the share price to double may not be that unreasonable an expectation. So, pick stocks that show good signs of growth in the future. Typical indicators of this kind of growth are the sales numbers of the company. This can be obtained from the quarterly and annual financial reports released by the company. In addition to this, another source of information about how solvent the company is can come from the debt-to-equity ratio. The value of this ratio indicates whether or not the company will be able to pay back its debts.
What are the indications that a company is not performing well?
The first indication of a company not performing well is a drop in revenue. This, combined with a drop in profits can mean that the company is not doing well. Increasing debt is another indicator of a company not performing well. Another indicator that a company is on track to not performing well is the number of layoffs and the frequency of those layoffs. This should not be confused with layoffs related to automation or with regular attrition. These are just some of the factors that you can consider while evaluating whether or not a company is performing well.
When should you stop investing in a particular stock?
If you have invested in a particular stock and the stock has increased in value by a lot since you first invested, you need to take a step back and evaluate where it is going. Every stock will have a bubble period and when the bubble bursts, the stock will go down in value. When your stock increases by a lot in value, check the direction the company is heading to. See whether the price increase is being fueled by hype or because there is a genuine reason to be excited about the company. One of the best things you can do with stock investments is to know when to walk away. For instance, if you have shares of a company and those shares doubled in price over the course of two or three years, which was the time period you had fixed for your returns, then a decision is to be made regarding the stock. At this point, check if the company’s growth is on par with its peers or if it is an explosive growth confined to only that company. If it is an industry-wide growth, you can continue to hold onto the stocks but if it is singular growth, you might want to sell your shares.
There are other factors that indicate whether you should stop investing in a particular stock. If a stock you have invested in is decreasing in price over the course of time, it might not be the best time to increase your holdings without checking what is causing the price drops. This might seem counterintuitive but it is the best way to ensure that your holdings are not compromised. Also, if you are struggling with your personal finances, it might not be the best idea to invest in stocks. Stocks are inherently unstable and investing in them when you are not in a stable place with regard to your personal finances can cause major issues. Another sign that you need to stop investing in stocks is if you have invested in a number of different companies over the course of time and none of your investments have given you a good return yet. This is an indicator that you are not picking stocks correctly. Therefore, it might be best to evaluate if you want to continue investing in stocks. If you decide that you do want to continue, you should take help from financial advisors who can guide you on this topic. You can check out stocks for indices like nifty 100 here.
Conclusion: A stock cannot be considered a stable investment vehicle. It would be best to invest in a stock after proper research. This research should also take into account your current and possible future financial obligations. Whatever investment is made in stocks should be done using income that you do not actually need. This is because even if your stock tanks, your losses will be confined to that particular stock and will not affect your normal lifestyle. If you are not able to pick stocks that give good returns, it might be best to not invest in stocks at all.